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Non-domestic properties: final chance to comment on MEPS

Until 2 September 2014 the Government is consulting on how best to implement provisions in the Energy Act 2011 which place a duty on the Secretary of State to bring into force regulations to improve the energy efficiency performance of existing buildings in the domestic and non-domestic private rented sector in England and Wales. The regulations at the heart of the 6 week consultation have been expected for some time. They will have potentially significant implications on property investment, lending, asset valuation and practical management of energy requirements.

Non – Domestic Consultation

The present proposals are to require a minimum Energy Performance Certificate rating of E by 1 April 2018 (for all new tenants) and by 1 April 2023 (for all existing leases).

Fifteen questions are posed in the consultation on the implementation of the Energy Act 2011 provision for energy efficiency regulation of the non-domestic private rented sector (click here to see our recent lawnow for more details).

In view of the limited timescale DECC has been holding a series of workshops to obtain feedback on the proposals.

Points to consider

The following key concerns and observations were noted at the recent stakeholder workshops conducted by DECC on the 5th and 20th August:

The proposed phased introduction of the regulations: the requirements will only apply to new leases to new tenants from 1 April 2018 and to all leases from 1 April 2023.

It is expected that the online non domestic EPC register will inform Trading Standards officers of which properties with EPCs are below “E” as at 1 April 2023 and which properties should be targeted for non-compliance.

The new regulations only apply to buildings which hold an EPC. This is perceived as a weakness in the policy as there are many commercial buildings which do not hold EPCs and therefore are not immediately caught by the regulations.

There is a call for transparency in future proposals in setting a long-term minimum maximum efficiency standard and the stop gap date (e.g. ”A” EPC rating by 2030) to assist investor certainty. Stakeholders are calling for a long-term trajectory that will provide industry with clear targets and destination dates.

Certain proposed time-limited exemptions for the energy efficiency standard attainment are required in the interests of fairness to landlords. Policing of reliance on the exemptions will be required either by way of self notification or by way of certification. For example, where a landlord needs to obtain consent for proposed works but such consent is denied, it is not clear how the landlord would prove that it did everything it could to contact the tenant to obtain the consent and what form of evidence would suffice. Rather than try to prescribe the form of evidence required the favoured approach at present appears to be to place the onus on those relying on the exemption to provide sufficient evidence.

There is current ambiguity in the time limited exemption that the rating obligation will not apply where the proposed works pose a high risk of materially devaluing the property. Further clarification on this point is expected. The idea is to allow the use of the exemption in limited (but unprescribed circumstances) to ensure that it only applies where the energy efficiency works would pose a genuine risk to value. One example would be that the proposed measure significantly reduces the lettable area.

Concerns have been raised as to how the proposed law would ensure that landlords bear no up front cost for improvements, whilst retaining an attractive pay back period and with improvements that are technically, functionally and economically feasible. Stakeholders noted that whilst the standard pay back period under the Green Deal is 15-25 years, where the remaining life of the building is less than 15 years it would be more economic to carry out only improvements with payback periods within that life. One possible alternative would be use Table 6 of Part L of Building Regulations 2008 “Conservation of Fuel and Energy – Buildings Other Than Dwellings” where measures listed are considered to be economically feasible as they achieve a simple payback not exceeding 15 years. Stakeholders also questioned whether payback should include such factors as planning, design and business interruption.

Whilst the provisions in the Energy Act 2011 effectively state that subject to certain exemptions the letting of a commercial building with an EPC will be prohibited if the minimum standard is not achieved, the approach currently suggested is that enforcing prohibitions midway through a tenancy by requiring the vacation of the premises would unfairly penalise a tenant. The alternative being proposed is that instead the penalties be robust enough to act as a deterrent. Proposals range from a civil penalty calculated by reference to a building’s rateable value or recouping the value of the rent for the period of the time in non-compliance (where there is a rent free period there will be an alternative equivalent). Views are sought on what would act as an appropriate deterrent.

Trading Standards officers are to enforce the regulations. There is some suggestion that further funding is required to ensure adequate enforcement. One way expressed of doing this was to allow Trading Standards to retain part of any civil financial penalty applied in the event of breach of the regulations. Concerns were raised that where any regulator has to exercise genuine discretion in the imposition of financial penalties the protection of the proper and genuine exercise of discretion may be influenced if a direct income stream were to be involved. Views on this issue are welcomed in responses to the consultation.

Next Steps

The regulations are part of a gradual trajectory towards energy efficient buildings for the existing building stock. The trajectory will increase over time and therefore it is important that the concepts within the regulations are workable, understandable, capable of being enforced but also transparent in enforcement and direction. Any feedback should be sent by 2 September tonondomprsconsultation@decc.gsi.gov.uk.

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